Asset Allocation and Portfolio Rebalancing Paid Off

Posted on January 4, 2010 at 1:40 PM PST by

As you review your returns for the last year, and possibly the last decade, you may agree that retirement investing was dealt a hard blow; what you may not be aware of is how portfolio rebalancing made great efforts to lessen one’s losses. Allan Roth of CBS MoneyWatch gave some noteworthy advice for the next decade in his article ‘Why It Wasn’t A ‘Lost Decade’ for Investors’that I could not help but re-iterate. His article highlights how an asset allocation and portfolio rebalancing paid of in the last decade and how one should learn from that going forward.

He first suggests “setting an asset allocation for your portfolio and dollar-cost-average your investment dollars into low-cost, broad index funds.” One can do this by either deciding to use the service of an investment adviser to create a customized asset allocation, our by using a ‘do-it-yourself’ tool offered by companies like MarketRiders, AmeriTrade or Fidelity to manage your own portfolio.

He then goes on to state the importance of ‘rebalancing your portfolio when your asset tilt gets out of whack because the markets surprise you, as they surely will. This means forcing yourself to buy stocks when they’re down and selling when they’re up. Doing so allows you to take advantage of irrational investor behavior rather than being a victim of it.” Investment rebalancing can be quick and easy with the ‘do-it-yourself’ tools on the market today, enabling one to realize even greater returns.

What made me smile most when I read his article was: “Don’t buy into the hype that asset allocation is dead and that now is the time for active investing. Arithmetic works every bit as well in bad financial markets as it does in good markets. If you see ugly returns on the indexes in the next decade, just smile and realize how much better you are actually doing.” For ones like me that take great comfort in seeing things in black and white, is there any other choice than going with an asset allocation and rebalancing as needed. The numbers speak for themselves.